The present invention relates to a computer-implemented method and system for analyzing the performance of financial securities consistent with a long-term investment strategy. In particular, the present invention relates to a computer-implemented investment analysis tool adapted for use with a dollar cost averaging (DCA) strategy wherein an investor invests in a financial security over a period of time to realize the value of compounding and to achieve a financial goal, while reducing the risk associated with putting a lump-sum investment in the market at the wrong time. The present method as implemented on a computer system, includes the Internet, and allows for ordinary inventors to easily access the invention and use it for personalized investment analysis consistent with their investment strategy.
Financial advisors and mutual fund prospectuses often cite a DCA strategy for use by investors to invests in securities over a period of time, so as to realize the value of compounding and reduce risk, as the best way to build wealth in the long run. The strategy is widely followed by millions of investors who make contributions to their company sponsored retirement plans at regular intervals; by individual investors trying to accumulate wealth over a period of time with modest investment and to leverage the value of compounding; and by investors who prefer to spread out their investments over a period of time, rather than making a lump sum investment at one time, to reduce risk.
Like other investors, these investors while recognizing that past performance does not guarantee future results, they nevertheless rely on past performance statistics, to a varying degree, in making investment decisions, or to model their portfolios, or to track their portfolio performance and or to set financial goals.
In the prior art, usually the past performance statistics can be seen in the form of price-trend charts that shows, for example, percentage rates of return in a financial security that was held for a certain time period; or a hypothetical graph that shows the market value of a one-time investment in a financial security held for a specified period of time.
Price-trend charts typically show a split-adjusted price of the stock over a period of time ranging from a few days to several years. While price-trend charts are useful to indicate the general price-trend of securities, the information they provide is lacking in depth and, consequently by themselves, these price-trend chart information is not a reliable indicator of financial performance.
Similarly, rates of return indicators for a security are typically presented in the form of rates of return on the security held for a period of time such as a one, three, five or ten year time period, or a rate of return for the life of the security. While these rate of return charts are useful for indicating average rates of return, they do not provide sufficient insight into the market value of investments, which for many is the ultimate goal for measuring wealth.
A hypothetical graph showing the market value of a one-time investment in a financial security held for a specified period of time may dramatically depict the market value of a one-time investment. However, this information is of limited use to an investor whose investments pattern and amounts may differ from the hypothetical investment amount, and who is making several purchases of the security over time.
As a result, an investor interested in obtaining information pertaining to the performance of financial security consistent with a dollar cost averaging strategy is often faced with the problem of either making the investment decisions based on insufficient information available from prior art methods, or is forced to undertake the daunting task of obtaining and analyzing large amounts of raw data, then understanding and applying a complex algorithm to analyze the data, and then perhaps setting up a complex spread-sheet to obtain the necessary information. Obviously, to the ordinary investor, this process is not only time-consuming and laborious, but is subject to errors.
Accordingly, there is a need for a computer-implemented system that will allow investors to interactively query and analyze the performance of securities, consistent with a long term investment such as a DCA approach, a need that is potentially common to millions of ordinary investors.
In accordance with the present invention, there is provided a computer-implemented method for analyzing performance of financial securities consistent with a long-term investment strategy, the method utilizing a computer system having a computer processor programmed to electronically process data and display information, the processor being electronically connected to input and output devices and to computer networks, the method comprising the steps of:
providing said computer system;
obtaining and inputting into said computer system, application content variables comprising prices of securities and incomes from said securities, said securities being securities of interest for investment, said securities being identifiable by a security symbol;
inputting into said computer system, investment parameters comprising
a security symbol of interest, said security symbol of interest being included in securities in said application content variables,
investment amount in said security of interest,
investment frequency,
investment term, and
performance duration time period pertaining to an investor""s preference for analyzing said security""s performance;
interactively utilizing said computer system, in conjunction with said investment
parameters and said application content variables, calculate an internal rate of return for said security utilizing the formula:
MV=xcexa3Ai(1+R)Ti
xe2x80x83where,
MV=market value of an investment in said securities at the end of said performance duration time period, said market value being equal to the cumulative number of securities purchased multiplied by the price of said securities at the end of said performance duration time period,
Ai=cash flows within said performance duration time period comprising investments, withdrawals, dividends and cost of investments including transaction costs, commissions and other expenses associated with said investments,
Ti=a ratio of the total number of days in said performance duration time period that said cash flow Ai has been in, or out of, a portfolio, and where Ti is calculated from:
Ti=(Dxe2x88x92Di)/D and where
D is the total number of days in said performance duration time period and Di is the number of days since the beginning of said performance duration time period in which said cash flow has occurred; and
outputting on said output devices, investment and performance information comprising market value of said investment, time-weighted internal rate of return of said investment, cumulative investment amount and cumulative number of shares purchased at the end of said performance duration time period.
With the present invention, an investor is allowed to interactively analyze the performance of financial securities wherein the investor invests in a financial security over a period of time to realize the value of compounding and to reduce risk. The advantage of the present performance analysis approach over the prior art approaches which are all concerned with measuring performance based on a one-time investment strategy, can be seen in the example shown in Table 1. In this example, the rates of return for both approaches are measured by a computed Internal Rate of Return (IRR). The IRR is a time weighted measure of performance and is defined as the discount rate at which the net present value of all cash flows equal to zero.
As can be seen in Table 1, a one-time investment of $10,000 at the end of 1989 in Company A, based on the prior art approach, appreciates to a market value of $18,467 and yields an internal rate of return of 6.4% over a 10-year period from 1989-1999. By comparison, a $10,000 investment in Company A using a DCA approach wherein $1,000 annually is invested in Company A during the same period results in a market value of $21,495 and yields an internal rate of return of 13.7%. Hence, regarding the investment in Company A, if the investor had relied upon the prior art approach, instead of the DCA approach, the internal rate of return would have been understated by the wide margin of 7.3%.
Similarly, regarding Company B, here the internal rate of return variance between the two approaches is only 2.3% but there is a striking $234,646 difference in the market value of the investment between the prior art and the DCA approach.
These findings reflect the importance of measuring financial performance consistent with the investors"" investment strategy and to allow for the investor to make informed decisions with regard to stock selection, performance tracking and setting financial goals.
The present invention, which allows the investors to interactively query the performance of financial securities consistent with the DCA investment strategy, is available to investors on a standalone computer or through a computer network such as the Internet.
In the latter case, the invention is accessible through a company""s web site that offers dividend reinvestment and or stock purchase plans; or on the web sites of stock transfer agents, or web sites that specialize in dollar cost averaging, or web portals that specialize in direct stock purchase, or web sites of mutual fund vendors, or web portals that provide equity research and personal finance tool links or brokerage, or other web sites that link to or incorporate the invention.
In summary, the method of the invention is as follows. Upon accessing the invention as embodied in a computer system, the investor is presented with a computer screen that prompts the investor to input the following information: security symbol, investment amount (initial amount, periodic amounts, reinvestment of dividends), investment frequency at which the investor will make investments in the security (daily, weekly, biweekly, monthly, quarterly, yearly), investment term, and performance duration.
The invention then takes the investment parameters and, in conjunction with the application content variables that include the price of the security and the income from the security, calculates the internal rate of return (IRR).
The internal rate of return is computed by solving for the value of xe2x80x9cRxe2x80x9d in the following equation:
MV=Ai(1+R)Ti
where,
MV=Market value of the investment at the end of the period (cumulative number of securities purchased x Price at the end of the period)
Ai=Cash flows within the period, which includes investments, withdrawals, income such as dividends and cost of investments such as transaction costs, commissions and other expenses.
Ti=is the portion of the total number of days in the period that cash flow Ai has been in (or out of) the portfolio. Where, Ti is:
Ti=(Dxe2x88x92Di)/D
where D is the total number of days in the period and Di is the number of days since the beginning of the period in which the cash flow has occurred.
From this calculation, the time-weighted Internal Rate of Return for the security and the related performance information including the cumulative amount invested, cumulative number of securities purchased, and the market value of the investment at the end of the period are displayed to the investor.
Preferably, the process and the system of the invention is enhanced to include optional variables such as risk characteristics and additional features such as portfolio analysis, investment strategy analysis, modeling and forecasting requirements specific to an investor.